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Itamar Franco, June 28, 1930 – July 2, 2011

Ex-President of Brazil Itamar Franco died today, aged 81.

Franco is memorable for many reasons, but perhaps his legacy is that he took over the helm of Brazil at a tough time in 1992 and within two years had got the runaway four digit Brazilian inflation rate the time under control. He did it by bringing institutional stability to a then-fraught country and his key move of appointing Cardoso as his FinMin who did the heavy financial lifting, brought the economy back into the bound of reality and subsequently won himself enough political capital to succeed Franco in 1995. 

One datapoint about Franco, however, is that he left office with a 90% approval rate and not even Lula could beat that. Today President Dilma Rousseff has declared seven days of official mourning in Brazil, which also gives you an idea of the importance of the man in his society.

Itamar Augusto Cautiero Franco, 1930-2011.  D.E.P.

UPDATE: Felix Salmon points your humble scribe to the Bloomie report of Itamar's passing

IKN recommends: LatIntelligence

Here's the link to LatIntelligence, a "serious" blog on LatAm political and economic affairs* that's existed in a very quiet manner for a couple of years, but in the last three or four months has picked up the pace of posts and is becoming a very decent read. Run by a certain Shannon O'Neill (biog link here that includes photo with nice smile...we like nice smiles), it doesn't have a strong political line to sell and its apparent neutrality is one of its best points. Also strong is the picking of individual cases that give a window to larger political and cultural issues, along with sober analysis of subject matter that shows O'Neill knows more about her subject that most.

IKN recos LatIntelligence to those who want to know more about how the region ticks. Here's the link again and as from today you'll also find it in the blogroll thingy over there on the right. Do like me and put it on your RSS.

*unlike your current port of call, but you should have realized that years ago

Gold Resource Corp (GORO): Barron's goes the Muddy Waters route

  • It's a hatchet job
  • Its target, Gold Resource Corp (GORO), has plenty of reason to be the target of such a hatchet job. 
  • However it doesn't have every reason to be a target, so the article's biased nature and highlighting of all the negative aspects is clear to see.

So what we have is a Muddy Waters type of negative article to read, which might be enough to put this company under a long-overdue spotlight. After all, Muddy Waters didn't have to be right on everything to blow Sino Forest ( out of the water, Carson Block & Friends just had to be right on enough things to make their point. As for GORO, not everything is wrong at the company, but there's certainly enough heterodox stuff at GORO to make it deserving of more scrutiny, the type of scrutiny that a U$1.3Bn market cap company deserves. It's probably healthy all round to see this Barron's story, because if there really is enough meat on the GORO company it will survive and thrive on the refuting of criticisms such as in this report.

So go read the piece written by Michael Santoli for Barron's yourself (here's the link again to make sure you do). By way of a primer, here's a chunk of the script:

"...across the street from the Broadmoor Hotel is a $1.7 million, 3,600-square-foot town house zoned for residential use that serves as the corporate headquarters of Gold Resource (ticker: GORO), a 13-year-old junior mining company working some properties in the southern Mexican state of Oaxaca that has soared to a $1.3 billion stock-market value, thanks to the public zeal for gold investments and management's promises of having "some of the highest-grade deposits in the world." When Gold Resource acquired the town house last summer as a workplace for its five corporate employees, it paid the equivalent of almost 700 months' worth of the rent on its prior office space.

"If this real-estate indulgence were the only worrisome element in the Gold Resource story, perhaps investors would be safe in overlooking it. But it is only one red flag among many that haven't been heeded as the company's shares have run from 4 to 24 in the past two years, bestowing enough heft in market capitalization to win Gold Resource entry into the Russell 2000 index.

"In reality, the company is run by a small group of family members who have steadily sold shares on the way up, consistently promised more production than has been delivered and not conducted formal independent drilling studies to verify their claims that they will soon be mining 200,000 ounces of gold equivalent a year at zero cash cost."

DYODD, dudettes and dudes. Thanks for the headsup on the article sent out to reader A.

UPDATE Sunday AM: The Barron's note has now gone behind a paywall thingy, so......
The Glittering Prize 

Feature | SATURDAY, JULY 2, 2011 


Gold Resources has a luxe new headquarters and a highly compensated management. Now all it needs is gold. 

The Broadmoor resort in Colorado Springs has served for 93 years as an enclave of leisure and luxury in the shadow of the Rocky Mountains, centered on a five-star hotel and featuring a pro-caliber golf course. This week, it will serve as host to the U.S. Women's Open tournament. 

Somewhat more improbably, across the street from the Broadmoor Hotel is a $1.7 million, 3,600-square-foot town house zoned for residential use that serves as the corporate headquarters of Gold Resource (ticker: GORO), a 13-year-old junior mining company working some properties in the southern Mexican state of Oaxaca that has soared to a $1.3 billion stock-market value, thanks to the public zeal for gold investments and management's promises of having "some of the highest-grade deposits in the world." When Gold Resource acquired the town house last summer as a workplace for its five corporate employees, it paid the equivalent of almost 700 months' worth of the rent on its prior office space. 

Some neighborhood: Gold Resource has set itself up in a town house across the street from Colorado's Springs' swanky Broadmoor Hotel, above. 

.If this real-estate indulgence were the only worrisome element in the Gold Resource story, perhaps investors would be safe in overlooking it. But it is only one red flag among many that haven't been heeded as the company's shares have run from 4 to 24 in the past two years, bestowing enough heft in market capitalization to win Gold Resource entry into the Russell 2000 index. 

In reality, the company is run by a small group of family members who have steadily sold shares on the way up, consistently promised more production than has been delivered and not conducted formal independent drilling studies to verify their claims that they will soon be mining 200,000 ounces of gold equivalent a year at zero cash cost. 

GOLD RESOURCE WAS CO-FOUNDED IN 1998 by William Reid, whose career in mining included a stint as head of U.S. Gold from 1977 to 2005, when he sold control of that company to Canadian gold entrepreneur Rob McEwen at a valuation of around $12 million. 

Bill Reid's brother, David, is Gold Resource's vice president of exploration and oversees drilling at the company's main El Aguila property in Mexico. Bill's son, Jason, was named president last year. Rounding out the executive ranks is Greg Patterson, head of corporate development. 

The company did a self-underwritten initial stock offering in 2006 with the help of Bill Conrad, co-founder of a firm called MCM Capital Management, in Denver. Conrad has been a backer and/or a director of several public micro-cap companies since the 1990s, some of which were delisted or merged into other companies as shells. Gold Resource's former part-time chief financial officer, Frank "Monty" Jennings, left earlier this year to serve as full-time CFO of Synergy Resources, an oil-and-gas driller for which Conrad also serves as director. 

Bill Reid served as interim CFO until last month, when the company signed on another part-time CFO, Paul Oberman, who works for a temporary-CFO firm and will be paid by the hour. The company's auditor, Stark Schenkein, is a local Denver firm with only a handful of small public-company clients. 

View Full Image 
.Conrad, who owns some 400,000 shares, is on the Gold Resource board as lead director, chairing both the audit and compensation committees. In the latter capacity, he approved his own cash compensation of $260,000 last year for his service as a director in a year when the company lost $23 million on $14.8 million in revenue. 

Bill Reid makes the rounds of gold investment conferences, extolling the rich vein of precious metals discovered at El Aguila, where the company built an open-pit mine and a mill and began production about a year ago. Reid claims that the company's mine, and an underground mine that was begun later, will yield enough lead and zinc byproducts to pay all of the cash costs of producing the gold and silver, leading to "zero cost" precious metals to sell, versus an industry average cost of $500 an ounce. 

As far back as 2007, company news releases were promising that production would begin the next year. But the start kept being pushed out because of permitting problems and construction delays. A representative explanation came in an April news release headlined, "Anomalous Storm Impacts Gold Resource Corporation's Aguila Project." The open pit, which was targeted to yield 70,000 ounces, produced only 20,000, leading to the expensive and complicated plan to do more underground blasting. 

In aggregate, over its dozen years of existence, the company has spent $95 million raised from equity investors to produce a total of $26 million in revenue, with $11.3 million of that coming in the quarter ended March 31 from the sale of "metals concentrates" to a single buyer, the closely held commodity dealer Trafigura Group, which did not respond to a request for comment. Neither Bill Reid nor Conrad responded to e-mailed questions. 

INVESTORS NEED TO TAKE the Reids' word on the mineral content of its deposits and how much it will cost to get them out of the ground, because the company has not sought an engineering study that could lead to estimates of "proven and probable reserves" under Securities and Exchange Commission standards. Bill Reid has been vocal about the wisdom of this approach, saying it would have taken years to complete such a study, and it was preferable simply to get into production as quickly as possible. Apex Silver Mines, now called Golden Minerals, explored the site in the early 2000s but walked away. Canyon Resource and Heemskirk were partners in the project but passed on their rights to acquire a larger stake in the company. 

Jason Reid, the president, in a series of e-mail exchanges, points to the endorsements of the company's two largest outside investors as indications of the value of the mining assets. Hochschild Mining (HOC.UK), a small Peruvian producer, took a 27% stake in the company as part of its strategy of acquiring a basket of young mining companies. 

Yet Hochschild acquired the stock at an average price of less than $5 a share and chose not to participate in the private placement last year, at 16, that raised $56 million via Jefferies & Co. While Hochschild geologists have re-assayed and reviewed some of Gold Resource's drilling core, no independent party has performed its own drilling, sampling and analysis. Hochschild's Isac Burstein, who is on the Gold Resource board, declined to comment. 

.The other large investor is Tocqueville Asset Management, whose top-performing Tocqueville Gold Fund (ticker: TGLDX) is managed by John Hathaway (subject of a favorable 2010 Barron's profile). Tocqueville owns more than 5% of the company. Like other bulls on the stock who discussed it with Barron's—a group that includes Michael Dudas of Jefferies, the only brokerage analyst who covers it, and John Doody of Gold Stock Analyst newsletter—Hathaway concedes that the Reids have taken an unconventional approach, but now that they are in production, the mine should bear out the promised value of the asset. 

Gold Resource has hired a firm to complete what's known as a 43-101 study, a Canadian standard for estimating "indicated" and "measured" mineral resources that is far less rigorous than the SEC's "probable and proven" standard. The effort is mainly aimed at getting the stock listed in Toronto. 

Hathaway says his analyst, Doug Groh, a geologist, has visited the site twice and found the samples consistent with a potential deposit of two to three million ounces of gold equivalent. Taken at face value and assuming $1,500 gold forever, that represents $3 billion to $4.5 billion in gross revenue over more than 10 years' time, before deducting for maintenance, administrative expenses or any future town-house purchases, for a company already valued at $1.3 billion. 

Hathaway points out that his Gold Resource position has gotten so large "mostly by appreciation" in the stock. So, the Reids' vast promises notwithstanding, the largest holders, who have known the company the longest, have not been buying the stock at anywhere near the current price. Meanwhile, the Reids and Conrad have been consistent sellers of the stock. In the past year alone, the foursome has sold $13.7 million worth, according to 

Jason Reid says that the insider sales amount to only a small portion of management's holdings and reflect diversification of personal assets. He asked that any article wait until the second-quarter results are out, which he promised will show record production and earnings. He didn't wait for the numbers to come out to sell $700,000 in stock on May 19, a day after Barron's first e-mailed him some questions. He responds: "I may have sold more shares (representing a very small percentage of my holding) had you not contacted me, but I stopped selling as soon as I realized ALL your questions were/are slanted and I believe your article will be negative potentially driving down our stock." 

It's news to nobody that small mining companies can be promotional and hyperbolic about the underground riches they have found. Yet Gold Resource goes the extra step of promoting its stock with an unusual policy, begun in July 2010, of declaring special monthly cash dividends–lately four cents a share, for an annual run rate of $25 million. This despite the fact that the company's only profitable quarter, the first quarter of this year, required a few massages in its accounting, such as capitalizing mining equipment and supplies and a collapse in exploration spending. 

The Bottom Line 
Gold Resource's shares have almost doubled over the past year on a seemingly too-good-to-be-true promise of a "zero-cost" mine that could yield billions. Don't bet on it. 

.The company even has a tagline, "Earnings are opinion, cash is fact." They further propagate the gimmicky gold-bug idea of some day making its own gold coins to offer "dividends in kind." 

WHILE GOLD RESOURCE BOASTS that it is paying the dividend out of operating cash flow, the company has never, in a single quarter, produced positive operating cash flow. In the first quarter, when in its opinion it produced positive earnings, the cash balance fell by $9.7 million. The Reids use a measure called "mine gross profit" that ignores all construction and overhead costs. 

The dividends, which are categorized as "return of capital" for tax purposes, are funneling close to $4 million (in U.S. dollars mind you, not gold) a year to the Reids and Conrad in a tax-efficient way. And therein lies an interesting wrinkle. The dividends aren't taxed as income—unless the shares have been lent out to short-sellers. So there is a real incentive for investors to request that their shares not be lent out. 

That hasn't stopped the short interest from doubling in the past two months to 3.4 million shares. Clearly, some investors aren't taking the Reids' word on how much gold they have, or what it will cost to get at it, or when they might do so. That's probably wise.


The Friday OT: Red Hot Chili Peppers, Desecration Smile

The video is no great shakes but the song...oh the song. Such a good music band


Hugo your way and I'll go mine

Thanks due to all those who have mailed in already about this subject and no need for others to do so otherwise. With the greatest respect for kind readers, this is exactly the type of story that I don't usually post about because there's little point when 3500 other news sources will do it as well. Anyway and if only to head off other mailers at the pass (bless you all), for those interested in the horse's mouth here's the unfiltered story (the way I like 'em):

What matters

One get caughts up in the ebb and the flow, the daily gossip and jabbering, the fight for a dollar. A manner of things that, when you're inside and focussed and fixated, seem to be all-important. And then, all of a moment, you open up another junior mining company press release, catch yourself in a mirror and see the absolute unimportance of it all. You do this because suddenly something happens to people you've never met, something devastating and heartbreaking. And you just happen to be two nights into a three night roadtrip and the meetings you've done and will do, the friends you've caught up with all pale beside the thought of your spouse and children at home. 

So do yourself and the people around you a large favour; do something about it right now. Put aside that everso everso important work you're working on right now. Go over to your husband right now, phone your wife right now, pick up your kids and give them a massive hug right now, pay a surprise visit to your parents  right now, text your best friends right now, e-mail your brother right now, knock on your sister's door right now. Tell them you love them, get things in focus, do it for them and for you. Carpe diem.

Your author's deep and sincere condolences extend to Andrew Swarthout. News release follows


VANCOUVER, June 30, 2011 /CNW/ - Bear Creek Mining (TSX Venture: BCM / BVL: BCM) ("Bear Creek" or the "Company") is deeply saddened to learn of the accidental death of Karen Swarthout, the wife of  Chief Executive Officer Andrew Swarthout, in Tucson, Arizona. The Company would like to express its sincere sympathy on behalf of the entire team at Bear Creek Mining.
Catherine McLeod-Seltzer Bear Creek Mining Chairman stated, "We are sending Andy our heartfelt condolences during this difficult time. Karen was a remarkable woman in many ways. Knowing her personally as I did for many years, I am well aware of the difference she made in the lives of many people, both here in the Company, and in Andy's private life. She will be missed by all of us."
Ms. McLeod-Seltzer continued "We are confident in the strength and depth of both our senior management team and staff and all are stepping in during this difficult time to ensure normal continuity of the business. In addition, our very experienced Board of Directors have all made themselves available to assist  Bear Creek management and staff as well as to offer  Andy all the emotional support we can.  Bear Creek is a strong company with world class projects as well as extraordinary people of great depth.  Our hearts go out to Andy and their families."

Portage Resources (

 If you need to know more, find the IKN coverage of this scam here, here, here and here. Hopefully, we've saved at least one greenhorn from losing their money, but of you were even considering this stock at some point as a trade, do yourself a very large favour and stay away from junior mining forever. It isn't for you, that's a guarantee from somebody who knows how many bullshitters and sharks are waiting for you next time. DYODD, dude.

Chart of the day is....

....copper, last week's action.

Copper: Confounding Prophets of Doom Since 2009


IKN recommends: My Own Market Narrative

I've been meaning to highlight this blog, called "My Own Market Narrative", for a while. Maybe most interesting to regular IKN (and biiwii) readers, it's run by some scallywag with more money than sense that's recently fallen in love with junior mining trading and actually thinks your humble scribe knows what he's talking about. An interesting antidote to something or other...I just need to find out what the poison is.

The Portage Resources ( scam question of the day: What rhymes with pump?

Answer: Dump.

You never know when a criminal scam such as the one being run by the scumbag Paul Luna Belfiore is going to flip the switch and turn the pump into the dump, but as Portage Resources ( passed $1 today the chances were getting higher. Sure enough, Luna decided he'd pushed it as far as possible and is now dumping part of his 75% holding on the unwary and unsuspecting. 

Freakin SEC should have closed this stock down already, where are you guys?


On the road

Posting won't be at zero for the next three days, but it may be sporadic as your humble scribe has an aeroplane or two to ride, a date or five to attend and a friend or three with whom to meet and enjoy a glass of wine (or hell's bells, maybe even two glasses). Anyway, for now here's a sliver of part 3 chapter 5 to chew over:

"They have worries, they're counting the miles, they're thinking about where to sleep tonight, how much money for gas, the weather, how they'll get there--and all the time they'll get there anyway, you see."

Eurasia on Peru's transition under Humala

PolRisk dudes Eurasia Group has just published its note on how the upcoming Humala government is shaping. Read it through but I'll say two things here.

1) I agree with this good analysis
2) Peru exposed companies are about to rebound.

Read on, kind lector...

PERU: Roadmap for the early Humala administration
28 June 2011 01:28 PM EDT

President-elect Ollanta Humala will soon appoint moderate figures for key economic and political posts in his administration, and that will be an important signal that he will not pursue radical policies. Nevertheless, Humala may soon have to face a trade-off between his fundamental goals of pursuing change while maintaining macroeconomic stability. During his first months in office, he will announce measures that will increase spending, such as an expansion of social programs. But he will probably increase spending gradually and seek to keep it within the parameters of Peru's fiscal responsibility law, at least in the near to medium term. Nevertheless, Humala's popularity looks set to drop during his first year in office due to high expectations of change among the electorate and the challenges he will face in delivering on campaign promises. This will increase political pressure on Humala, generating more incentives to pursue an expansive fiscal policy and take measures that could worsen the environment for investment.

Ollanta Humala will begin his administration by signaling that he will pursue relatively moderate policies, and by reaffirming his commitment to macroeconomic stability, a market economy and the rule of law. Such moderation is probably sincere and will be a function of several factors. First, he believes that maintaining macroeconomic stability and attracting private investment are both prerequisites for the generation of the conditions needed to achieve his social and economic goals. Second, he is well aware that most voters prefer moderate change over radical change. According to a recent Ipsos/Apoyo poll released on 16 June, 61% of voters think that Humala's government should be like that of Brazil's former president Luiz Inacio Lula da Silva, while only 11% said it should be like that of Venezuela's President Hugo Chavez. Third, he will need the technical expertise and political support of centrist political forces in congress where his coalition won only 36% of seats (particularly from former president Alejandro Toledo's group) to implement policy.

Humala's key advisors will be moderate

One important signpost of policy direction under Humala will be the appointments for key cabinet posts. He is likely to announce as early as this week moderate and reasonably respected figures. His transition team, led by Vice-president Marisol Espinoza, provides some hints on who will be his most influential advisors. Kurt Burneo, who was Alejandro Toledo's main economic advisor and became the main voice on economic matters in Humala's second-round campaign, will lead the economic team with the help of Oscar Dancourt and Felix Jimenez, who will oversee financial and budget issues, respectively. Burneo looks like the strongest candidate to head the Ministry of Finance. He has experience in office and is generally perceived as a moderate, but also believes that the state should play a larger role in the economy and invest more in social programs, a point of view which helped him win Humala's trust. In an interview over the weekend, Espinoza stated that the minister of finance would be from her party, but this doesn't seem to exclude Burneo, who has been working closely with Humala since the beginning of the second round campaign. In fact, Humala stated yesterday that is up to him to make appointments, suggesting some discomfort with Espinoza's comments.

Dancourt and Jimenez are also likely to occupy important posts in the administration. Dancourt has experience as a central bank official and is perceived as someone who has good technical credentials, which make him a good fit for president of the central bank's board. Humala has made a strong commitment to maintaining the autonomy of the central bank and is aware that higher inflation could undermine popular support for him. But he also seems to believe that the current president of the central bank's board, Julio Velarde, is too conservative. Felix Jimenez is a longtime Humala advisor with clearer leftist positions, but his background probably makes him a less likely candidate than Burneo to fill the post of minister of finance. Still, he will probably be appointed to a post in the ministry, where he would work with Burneo, possibly focusing on budget issues and the allocation of resources for Humala's social and industrial policies.

There is probably a higher risk that Humala's appointment to head the Ministry of Mines and Energy will have stronger nationalist views given his desire to increase taxes on mining and prioritize the domestic market in the supply of natural gas. Nonetheless, strategic decisions for the sector will probably be taken by his inner circle of advisors. Humala looks likely to pick one of three figures who are participating in the transition team: leftist former legislator Manuel Dammert, who has a track record of opposing privatizations and exports of natural gas; Humberto Campodonico, a leftist engineer and intellectual who is a longtime Humala advisor and has advocated supplying the domestic market first; and Herrera Descalzi, a former minister of mines and energy who joined the Humala campaign after the second round and is perceived as having more moderate views.

Relatively moderate figures predominate in Humala's inner circle of political advisors and strategists. His main political operator will probably be legislator Daniel Abugattas, who has developed close ties with Humala and who played a central role in the campaign. As a former businessman, he has relatively moderate policy views. There is speculation that he could become head of the Council of Ministers (a post also known as prime minister), whose role has varied in past administrations from a more political one-for example, as the point person for relations with congress-to one more focused on administrative coordination between the different ministries. But Humala may opt to keep Abugattas in congress, where he would lead efforts to advance the administration's legislative agenda, possibly as president of congress. Given Humala's lack of majority in congress, he will need a strong leader there. In that case, Humala could opt for someone with a more administrative profile for the post of prime minister, perhaps Ambassador Luis Chiquihuara, who is in charge of affairs related to this post in the transition team. Despite some speculation that Humala could appoint to the post respected independent lawyer Beatriz Merino, who was prime minister under Toledo and currently is head of the association of private pension companies, we see this as unlikely given Humala will probably pick someone with closer ties to him.

Another member of Humala's inner circle is Salomon Lerner, a businessman who has been one of his key strategists and point person with the business community. There is speculation that he could become the presidency's general secretary or even that he will not occupy a post in government, but he will probably continue to be an important advisor, even if an informal one. Finally, Humala's wife Nadine Heredia, who has played a role as a political advisor and strategist, will probably be a very influential figure. Early speculation that she could run in 2016 to succeed Humala indicates that she will be a key advisor and influential figure within his administration.

A gradual increase in spending

Humala will most likely announce during his first months in office some measures to implement key campaign promises that would lead to more spending, but he will seek to reassure voters and markets that this can be reconciled with responsible fiscal policy. Humala's advisors say that in order to meet their social and economic goals, the overall tax burden would have to increase by three or four percentage points of GDP, but spending will probably increase gradually. He will focus initially on expanding social programs that can have a significant social and political impact at a relatively low cost. The most important initiatives to be announced would be an expansion of existing cash transfer social programs, one which the largest is called Juntos, and the creation of a new, non-contributive pension benefit for the elderly called Pension 65. Humala's advisors estimated the cost of the new pension benefit at 0.8% of GDP and a substantial expansion of Juntos would probably cost much less (the program, which the previous Alan Garcia administration had already expanded substantially, currently benefits almost 500,000 families and its cost represents about 0.15% of GDP). Relatively strong economic growth-estimated to be somewhere between 5% and 6.5% this year and a bit lower in 2012-will help boost tax collection. So a Humala administration would probably have some fiscal room to increase spending without violating Peru's fiscal responsibility law which established a 1% of GDP cap on the public sector deficit, at least in the near term.

Humala will look to the mining sector as an additional source of revenue and will seek to expand the role of the state in other strategic sectors. While he has provided few details on specific measures, Humala has signaled that his administration will not seek to take over private assets. He has also hinted that he is moderating his views. For example, the policy document his campaign issued during the second-round campaign (called Hoja de Ruta, or roadmap) softened the wording about his plans to hike taxes on mining and says his administration will seek to keep the tax burden competitive. While the document maintains the position that the administration will renegotiate natural gas contracts to prioritize supply to the domestic market, Humala has signaled more moderation in fuel pricing policy. During the campaign he promised to lower the price of liquefied petroleum gas (LPG), but now says that this will come over time as LPG is replaced with locally produced (and cheaper) natural gas.

Humala's approval ratings will probably decline during his first year in office

While Humala will most likely start his term with high popular support, his approval ratings look set to decline during his first year in office, something that could lead him to face some policy trade-offs relatively early in his administration. According to the latest Ipsos/Apoyo poll, 70% of respondents approve of Humala as president-elect, which is significantly higher than the 51.5% of votes he had in the second-round run-off. This is due in part to the good will that presidents-elect usually enjoy, but there is also much expectation that Humala will be able to deliver on his campaign promises. Fulfilling such expectation will be challenging given that it will involve addressing difficult structural issues. For example, according to the Ipsos/Apoyo poll, most voters believe Humala should focus primarily on fighting corruption and crime. While Humala will probably announce initiatives on both fronts, delivering results will take time. Given that corruption remains well-rooted in the Peruvian state, it would not be a surprise if some high-profile scandal emerges in the near term, and that would disappoint many voters who have overly optimistic expectations about Humala.

In addition, Humala could lose some support because of social conflicts. Such issues, which have typically involved local complaints against natural resources projects, are commonplace in Peru and sometimes turn violent, as occurred recently in the southern region of Puno, where locals protested against mining concessions. Humala will certainly make efforts to consult more with local communities and diminish conflicts, but resolving the underlying structural issues that motivate conflicts won't be easy, so new tensions are highly likely and could hurt Humala's approval ratings.

If trends seen during the last two administrations are any indication of the future, Humala could see a rapid decline in support. This happened under both Alejandro Toledo and Alan Garcia, who started with approval ratings above 60%, but saw them decline sharply during their first year in office (see graphs attached).

Support for Humala looks unlikely to drop as much as support for previous presidents, however. The popular measures he will announce in the beginning of his administration will help maintain support for him among the poor, who constitute his social base, and create a perception that he is pursuing change. From a structural perspective, economic improvements and the social programs of past administration could be slowly reducing popular dissatisfaction with the political class, which has been widespread in Peru. One possible indication that this is occurring is the fact that Alan Garcia's approval rating bottomed out at a higher level than Toledo's did. While Toledo's approval rating dipped below 10% in his third year in office, Garcia's lowest popularity was around 20%. It is important to note that both saw a recovery in their approval ratings toward the end of their terms.

Policy repercussions

This means that a decline in Humala's approval ratings probably wouldn't lead to a fundamental policy changes, but it would increase incentives for him to deepen his social and statist policies, contributing to a negative turn in economic policy. We have made the case that he will not be radical, but that he will push the limits on both macro and microeconomic policy when facing difficult trade-offs between maintaining macroeconomic stability and pursuing his goal of expanding the role of the state in the economy. If his approval rating drops, he will have a greater incentive to do so as a way to recover some political ground.

For macroeconomic policy, this means that Humala would pursue an increasingly expansive fiscal policy. He will expand social programs, invest more heavily in infrastructure, increase public sector wages, and seek a greater role for state-owned companies. He could, however, move more aggressively on all those fronts if needed to boost popular support. Humala probably wouldn't go as far as completely abandoning Peru's fiscal responsibility law as a reference for fiscal policy. But he could very well violate the 1% limit on deficit-it is important to remember that there is no severe penalty for doing so. He is unlikely to undermine the autonomy of the central bank, but if it tightens monetary policy enough to dampen economic growth, political pressure on the central bank and tension with the executive would increase.

Humala's sector specific policies could also take a more negative direction. For example, he would have a greater incentive to extract more rents from the mining sector to finance new spending. It would probably take at least a few months before his government has a tax proposal ready to send to congress, so Humala's declining approval rating would increase the risk that he will opt for an aggressive tax hike. His weaker political standing could force him to make some concessions in order to win congressional approval for the proposal given that he will need support for centrist parties. However, this could increase the risk that he will take a tough position in talks with companies who have tax stabilization agreements as he seek to renegotiate the terms of these contracts (they represent about 25% of Peru's mining production). Humala could also take a tough position on negotiations with natural gas producers to redraft existing contracts and prioritize supply to the domestic market, and more actively seek to develop the state's capacity to operate in the hydrocarbons sector.
Erasto Almeida
Analyst, Latin America

Paywalls still don't work, FT Tilt edition

So the quick back history is:

1) The FT launched its new service, FT Tilt, to cover emerging markets a few months back.

2) Your humble scribe joined up and found a few items and/or posts interesting enough without ever getting wildly enthused.

3) After a while FT Tilt's main "professional" serive went behind a paywall and asked me (and all other users for certain) to pay for access.

4) Your humble scribe let his free-until-then trial sub drop, cheap as he is (as are most other interwebnetpipes users when it comes to paying for news and current affairs)

5) Your author receives this mail from the guys at FT Tilt this morning:

Give FT Tilt another look - You've been upgraded back to Professional status
Financial Times - Tilt
Dear Otto,

It's been six months since we launched FT Tilt and we already have over 3,300 members coming to us for emerging markets financial news and analysis that they simply aren't finding elsewhere. I wanted to let you know that we will be upgrading your status back to pro-member for a summer trial. This means you will have full access to all Tilt content for a limited time. Our product and coverage has only gotten stronger and we hope you'll give us another look.

You can simply login at with your original username and password. If you have any questions or problems logging in, please let me know.
 Also, to find out about Tilt in a fancier, more colorful format, you can check out our brochure by clicking the link:

We will be sending out an editorial highlight email as well to our overall membership so apologies in advance for multiple emails. Please let me know if you have any questions or feedback and enjoy your full trial access! 


Ranjan Roy
Commercial Director - FT Tilt

(212) 6XX-XXXX
ranjan.roy AT

I have nothing against FT Tilt and the thing it offers, though I do feel obliged to comment that when it came to LatAm during my trial period I wasn't that bowled over with coverage (Brazil data was quite good, the rest was between thin and zero). But yet again the evidence of how paywalls don't work on the internet is plain here because in a different set-up, 3300 paying subscribers would be a good moneyspinner, but for a company under the auspices of FT it's 1) small beer and 2) extremely unlikely to cover the costs of running a service with a bunch of professional journalists running the show. 

Market it how they want, but putting me back on a free subscription for a limited period is an attempt to prop up a failing business model. I pass guys, with the greatest of respect for the reporters doing the gruntwork, because it's high time the world's established media companies approached the internet on the internet's terms and not on the agenda they wish to impose.

The Portage Resources ( scam: So waddya get for $471m these days?

Some scams are more subtle and some are easier to spot, so let's make sure we understand each other on today's post before we get started. Portage Resources ( is in Category Two and one of the most blatant rip-offs I've seen in 2011

I've been watching with amusement the pump and dump scam that is running around Portage Resources ( this last week, with plenty of bullshit in the paid tout press and it seems there's more than enough money left in the supposedly cash-strapped America to see this company move to frankly ridiculous valuations. now quotes at 74c a pop and when we recall that the company has 637 million shares outstanding (yeah dudes I shit thee not, and to make matters worse 75% of those shares are in the hands of the delinquent piece of toadcrap and company CEO Paul Luna) this means that the company is being valued at $471m right now. So what do you get for your money, folks? You get:

A letter of intent (i.e. not even a real asset and not even a contract to option in on a real asset, but a piece of paper that says the company intends to do a deal...nothing else) on a property in the politically impossible-to-mine North reaches of Peru.

A bullshit resource that has nothing to do with reality of 58m oz silver, but even if it had you're now valuing those ounces at $9 each, a mile above anything in the serious market, even amongst companies that are producing silver today.

A CEO who really is a piece of shit lying scumbag, of that be in no doubt.

A company with five hundred and thirty-three dollars in the treasury as per its last quarterly report. Doesn't that strike you as a little thin for a junior that the market is valuing at half a billion (with a B)?

The incessant pumping of boilerhouse scumbags who have a track record of separating the naive from their wedge. Have a look here and here for more.

The problem is that it's really difficult so far to get a lend on this thing and short it. If you can, do so, because it's the easiest money you'll make this year. Be clear that is being run to benefit insiders only, they're screwing thousands of people over right now and will leave the arena with your money in their pockets if you're daft enough to invest in this scam.

Chart of the day is...., weeklies.

We featured the strong run-up in coffee prices a couple of times in the recent past, so it's only fair to bring out the chart one more time to register the recent retrace as we're now 15% off the peak.



News today from the fabbo new integrated stock market system of Chile, Colombia and Peru, which has been created to let the three countries trade listed stocks between each other. It's also been fanfared with all sorts of fanfarey sounds ever since it was first mooted last year, has gone through exhaustive tests and then last month finally went live. So let's see how it's been getting on, via this translation of this story in Semana Economica:

MILA Transactions U$1m In First Four Weeks

27 June 2011

Today marks the first four weeks and one day since the start of the Integrated Latin American Market (Mercado Integrado Latinoamericano (MILA)), a system that brings together the trading platforms of Chile, Peru and Colombia, and the result of the first 20 trading day show few transactions during the Peru election period and high volatility in the Chilean market, reports newspaper El Mercurio.

According to the Chilean media source, the average daily volume of MILA is 12 million Chilean Pesos (U$25,310), which is 0.01% of trades conducted in the stock markets of Chile, Peru and Colombia. In total, U$1m has been traded on MILA, mostly from Colombian buyers in the Chilean market.

I'm fed up with reading and getting sent links to crappy English language reports and commentary on the Puno protests in Peru.... here's part of the script from yesterday's IKN Weekly issue 112 that contains a few facts.

The Puno protests: Trying to make head and tail of the situation
This is one of those situations that I’m unhappy to have called well, on a social level at least. On an investment level we may have been handed our ultra-bargain entry point (see the first part of ‘Market Watching’). As for the events in the Puno region this week, yes it’s ended in bloodshed because it was always going to end in bloodshed because that’s how Peru works (or doesn’t work, depending on your point of view). But what we also have is a growing protest that’s being badly reported in the English language by nearly all those who have decided to spill ink on the subject. That bad reporting has sometimes been deliberate and sometimes through simple innocent ignorance, but it’s not getting what’s actually going on in the Puno region of southern Peru very well. Here we’re going to try and remedy things with a basic roadmap.

The basic point to understand is that the protests that have captured headlines recently aren’t one protest but three. They are somewhat connected, because the second and then the third sprung up when those unhappy parties saw the success that the first group was getting, but when it comes to specific issues and demands there are three protests happening.

1) The Santa Ana Protest (for want of a better name). This is the one at the South end of the Lake Titicaca area that has blocked the border crossings between Peru and Bolivia. The first protest to happen, it’s also the one that captured all the headlines three or four weeks ago and is the one we started covering first way back in IKN104 (and virtually all editions since then).

2) The Carabaya/Inambari Protest: This one started up a couple of weeks after the Santa Ana protest began to catch headlines and concerns the area called Carabaya, which is up on the way to the Andean peaks Northwest of Lake Titicaca and centres around the town of Macusani. Although protests did mention local mining concessions as a secondary cause, the main reason for the roadblocks and strikes was the plan to build a very large hydroelectric power station in the Inambari valley area on the Amazon basin side of the same mountain range. The plan has now been scrapped.

3) The Azángaro/Juliaca Airport Protest: This is the most recent protest and came to a head this Friday with the deaths of five protesters at Juliaca airport, the only airport in the region that can take modern passenger planes from Lima. This protest was run by people from a town near to Juliaca called Azángaro, to the North of Lake Titicaca, and its mission was to stop the contamination of the Ramis River that runs from the environmental disaster area of the Rinconada informal mining zone up in the mountains and dumps pollution all along the run of the river and into Lake Titicaca itself (it’s ‘herself’ in fact, but that’s another story).

Now as mentioned previously there’s clearly a relationship between the three protests, as it would be more than strange to think that after years of relative tranquility, suddenly three protests spring up separately in the same area without any sort of connection. But in fact the connections are indirect and more about the second group seeing that the first group is getting results, then moving to make their own point (then the third group doing the same). As for the reasons behind the bloodshed in the third protest instead of the first two, that’s more about the individual circumstances of each blockade. In the first one, the Aymara indigenous protesting had a very strong leverage point against the government thanks to the geography of the area and the border crossing to Bolivia. That crossing carries a lot of trade between the two countries and is also relatively inaccessible (except for the blocked road itself), which means that control of the leverage point is easy to maintain. The second protest in the Carabaya region was more pacific (there were a couple of isolated incidents against junior mining warehouses run by SUR.v and YEL.v, nothing really bad however) but the locals are isolated there and they also have a decent bargaining chip; they can block the brand new Interoceanic road that runs between Peru and Brazil.

So to the third group from Azángaro, enthused by the positive results obtained by protest one and protest two, wanted to make their point and stop their river from being polluted so heavily. They had less obvious leverage with no key roads nearby and no economic target to pressure, so they decided to move on a communication point that’s heavily defended by forces of order and also easily approached from multiple directions, Juliaca Airport. Therefore when the protest tried to take over the airport, not only were police and military already installed but they also have specific orders and regulations that allow them to shoot to kill under exceptional circumstances if the airport comes under attack. Five deaths from gunshot wounds to heads and chests (instead of using rubber bullets or aiming at legs first) as well as 30 wounded by police shooting into crowds may be brutal, but it’s also legal under the circumstances and according to the law of the land (it’s up to you to decide whether that’s a good thing or a bad thing, I’m not my brother’s keeper on these things). What we do know is that this morning, the government of Peru published executive orders (15) that give environmental protection to the rivers that were the centre of the Azángaro people’s protest.

About that Flash update this morning, subscribers

The result: Three point eight.

Have a nice day.

River III

I couldn't sleep last night and this song just kept going round my head.

Yet again, the advantage of running a blog comes into play. No need to suffer alone.

Meanwhile, Dunkeynesian finds an interesting correlation between River and the share price of its sponsor, Petrobras (PBR).

Peru's new cabinet

Daniel Abugattas: Prime Minister
Kurt Burneo: Finance Minister
Humberto Campodonico: Minister of Energy and Mining

All unofficial of course, but that's what I've heard so far. The new ministers are due announced some time this week, by the way.

PS: Ah yeah, nearly forgot. Dancourt gets CenBank.

Chart of the day is....

...the Peru IGBVL "general index of the Bolsa de Valores de Lima, year to date:

The 800lb gorilla that's sunk the stock market these last two weeks is EPU, the Peru ETF.


River II

Inspired by this post and fellow sufferer DB.

¡Qué desencuentro!
¡Si hasta Dios está lejano!
Llorás por dentro,
todo es cuento, todo es vil.

The IKN Weekly, out now

IKN112 has just been sent to subscribers. As usual it's mostly written in 10 point Tahoma font and this edition has 13,679 words, which is about average I suppose.

Congratulations to Pan American Silver ( (PAAS)...

...for managing to kill two of its workers in Peru in separate accidents this last month. An impressive tally even by your pathetic health and safety record

And as is usual for the PAAS there are no work stoppages, no inquiries, no announcements in the press about the fatal accidents. The only place to find out about the PAAS deaths is at the right page buried in the centre of the Peru Mining Ministry website and it's only there because PAAS is obliged by law to pass the information along.

So spare a thought for Ronald Edson Comun Espinoza who was working as a contractor at Pan American Silver's Huaron mine. And spare another thought for Santos Martin Solano Salvador, who was a full-time employee at Pan American Silver's Quiruvilca mine. Because they're both dead now.

River te quiero igual